How to Deregulate Cities and States

Cost-benefit analysis and 'lookbacks' could lift the unnecessary burdens of occupational licensing.

A lot of attention has been devoted in recent years to overregulation at the national level. For many people, though, the regulations that hit hardest come from states and localities. The story of Uber's fight with overzealous local regulators is only a well-publicized tip of the iceberg. A 2012 study conducted by the Institute for Justice finds that 102 trades and occupations now face licensing requirements in states or cities. The people who suffer most from them are those without a lot of money or advanced education.

Numerous states regulate the practice of interior design. Others regulate barbers, cosmetologists and tree trimmers. To engage in the gentle arts of design, hair cutting, beauty treatment and tree trimming, should people really be required to run some kind of regulatory gauntlet?

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A widely overlooked part of
Paul Ryan's
antipoverty plan draws attention to the problem of occupational licensing, and it rightly calls on states and local governments "to begin to dismantle these barriers to upward mobility." But how? The answer, we think, lies in the adoption of a rigorous cost-benefit test. That test would impose new discipline on what state and local governments do—and it would eliminate unjustified barriers to job creation and economic growth.

We have a precedent already in place. For more than three decades, American presidents have required executive agencies to offer detailed analyses of the costs and benefits of regulations—and have allowed agencies to burden the private sector only if the benefits justify the costs. The process was inaugurated in 1981 by President Reagan, and it has stood the test of time, having been endorsed by Presidents Clinton and
Obama.
No one thinks the process is perfect, but close observers generally agree that it has imposed an important constraint, and that the federal regulatory system would be far worse without it.

State and local governments today face an acute need for regulatory discipline. Even in ordinary economic times, it is important to ensure that when agencies impose significant costs, they do so for good reasons. But in periods of economic difficulty, stringent regulation can impose an especially serious toll on businesses, consumers and workers. Whenever regulations impose high costs—either as barriers to entry or by raising the expense of doing business—they threaten to impose job losses and increase prices, straining consumer budgets and reducing purchases (a particularly serious problem for the poor).

Remarkably, many governors and mayors lack any office or institution to evaluate the economic justifications for regulatory requirements. Cost-benefit analysis, undertaken by personnel with technical expertise, would provide the right mechanism—at least if they had some authority to constrain the issuance of unjustified regulations. Properly conducted and fairly applied, such a process would also operate as a safeguard against interest groups seeking to entrench themselves, limit competition, fend off justified safeguards or otherwise to enlist government on their behalf.

We would go much further. In 2011 the Obama administration, with bipartisan support, called for an ambitious process through which federal agencies would periodically evaluate existing rules, eliminating or streamlining them when cost-benefit analysis suggested that elimination or streamlining was warranted. The "regulatory lookback," as it is called—distinct from the Reagan-era process that applies to new regulations—has produced more than 500 reform proposals. Although the lookback remains a work-in-progress, the Office of Management and Budget estimates that completed reforms will save more than $13 billion in the near term.

States and localities should engage in comprehensive lookbacks of their own, eliminating and streamlining burdensome requirements, including occupational licensing. In some ways, in fact, states should be able to go far beyond the efforts of national government, because of their relative ability and incentive to experiment. We envision a kind of competition at the state level to activate creative thinking about how to institutionalize regulatory simplification, freeing up the private sector without jeopardizing public safety, health, the environment and quality of life. Now is the time to begin.

Mr. Glaeser is a professor of economics at Harvard. Mr. Sunstein is a university professor at Harvard and a former administrator of the White House Office of Information and Regulatory Affairs. This is drawn from an essay recently published in National Affairs.